WEAKNESSES

RISK ASSESSMENT

Modest growth driven by domestic demand

In 2016, Uruguayan growth remained close to stagnation, hit by weak regional demand, mainly from Brazil and Argentina, and by low commodity prices (cereals and, in particular, soybeans). In 2017, activity is expected to pick up but will remain modest. Internally, activity is likely to be buoyed by increased investment in connection with the infrastructure programme initiated by the government in the form of private/public partnerships. This programme benefits from financial support from the IDB (Inter-American Development Bank), which released a credit facility for USD 300 million in late 2016. In principle, this facility will be used to partly finance the companies investing in projects to improve the roads, modernise the railway and expand and dredge the Port of Montevideo. Household consumption is also expected to maintain a degree of momentum due to the expected decline in inflation, which will, nonetheless, remain below the target range (3%-7%) fixed by the central bank, fuelled mainly by the indexation of wages. Externally, the economic recovery in Brazil, the country's main customer for exports of goods and services, and in Argentina, the principal source of FDIs, is expected to sustain growth.

Towards a gradual fiscal consolidation

In 2016, the Uruguay's economic slowdown affected the government's fiscal consolidation plans included in the five-year finance act passed in December 2015. The government was counting mainly on increased tax collection driven by the dynamism of household consumption and the recovery of exports, which in the end did not take place. In order to limit the increase in the deficit and the public debt, the government is now counting on a more restrictive fiscal policy in 2017. It is thus relying on cuts to current spending associated with the functioning of the public administration and specifically on not filling vacancies and abolishing early retirement plans and overtime. The government has fixed itself a public deficit target of around 2% to 2.5% by the end of the presidential term in 2019. With regard to monetary policy, this is expected to remain focused on inflation targeting through the reduction in money supply rather than through raising key rates.

A current account deficit expected to continue to benefit from weak imports

In 2016, the current account deficit improved thanks, in particular, to the drop in imports fostered by weak energy prices, specifically those of oil, and weak domestic demand. Exports also declined, affected by relatively weak prices for raw or semi-processed agricultural products (soybeans, meat and dairy products), as well as by lower demand from the main trading partners (China, Brazil and Argentina). In 2017, external trade is expected to benefit from increased demand from Brazil (main customer) and from Argentina thanks to the expected economic recovery in both countries. Imports are expected to benefit again from relatively low energy prices, but the expected increase in investment is likely to generate a rebound in imports (especially of capital goods). The balance of services is likely to benefit from a rise, even though modest, in the number of Argentinian tourists while the income balance will still be hit by profit repatriation and interest paid on the public debt.

Growing tensions within the ruling coalition

President Tabaré Vázquez is having to deal with a decline in his popularity and the divisions which have arisen within the ruling coalition, Frente Amplio (FA), between those who support the maintenance of high social spending and those leaning towards a more restrictive fiscal policy. The regional economic slowdown effectively puts a brake on the increase in government income, threatening plans to reduce the budget deficit and the public debt, as well as the rise in spending (on education and health, in particular) promised by the government. The president meanwhile is faced with growing insecurity and allegations of corruption, under the previous administration, which will implicate some members of the FA. However, the country's political stability does not appear to be under threat. Meanwhile, Uruguay remains one of the preferred locations for FDIs in South America. With regard to external politics, in October 2016 Uruguay and Chile signed a new free-trade agreement aimed at deepening the existing trade links between the two countries. Uruguay thus hopes to benefit from the network of free-trade agreements enjoyed by Chile in the region. The country is expected, moreover, to continue to seek support from Brazil and Argentina for progress to be made in the negotiations for a free-trade agreement between Mercosur and the European Union.